Working capital is not a new concept. Banks have long-offered businesses loans and lines of credit to fulfill the need for additional resources. But what happens when a small business seeks an influx of cash from their neighborhood bank? It is no secret that banks are notorious for being risk-averse, wanting copious amounts of information, taking days or weeks to reach a credit decision, and seek to secure the company’s assets. These attributes run counter to the flexible needs of small businesses. Current trends dictate speed and convenience are key values for borrowers. That leaves banks scrambling to catch up to nimble, non-traditional financing sources.

These are some of the same reasons many small businesses seek financing through an alternative source such as a vendor, a broker or an online lender. The ability to receive business credit from an alternative lender simplifies the process and provides peace of mind for the business owner. In the highly competitive equipment finance space, one must keep up with market demands to ensure the customer is elated and impressed with the speed and ease offered by alternative financing.

Let’s get back to the topic of working capital. Here’s why it makes sense for equipment leasing and finance companies to consider offering a working capital product for their lessees. The overall market demand is increasing; Forbes, projected working capital will increase from a $15 billion (2017) industry opportunity to $40 billion by 2020, a statistic that cannot nor should be ignored (reasons driving that demand are fodder for another article). Fundamentally, the economic laws of supply and demand will motivate movement in the leasing space causing more equipment finance companies to enter the working capital pool. There is value to your customer, and you, within this growing segment— however there are several other reasons for an equipment finance company to offer this product to their current customer base.

Demand for working capital is on the rise and logic states that equipment finance companies’ lessees are included in this population. If this same population seeks a working capital product, the equipment finance company must decide if it is going to “allow” its customer to seek another lending institution to fulfill the need or offer the product directly to the lessee. An example that resembles similar dynamics is the large department stores (Walmart, Target, etc.) building super-sized retail locations to include groceries. The motivation was not necessarily for profit as grocery margins are tight. It was a strategic move to offer customers one-stop convenience and also it was an opportunity to build brand loyalty. This multi-service/product approach within companies (ahem, Amazon) is growing and reflects society’s need for saving time to meet evolving consumptive behavior.

Equipment finance companies concerned with exposure should also consider the upside to an outside partner relationship product offering. Separating out working capital from an equipment acquisition strengthens the individual transaction and allows the equipment finance companies to be fully secured. This simplified syndication structure provides the equipment finance company a path to funding core leasing exposure and a stream of fee income from the working capital partner, both of which should result in a stronger balance sheet.

Any business understands the importance of the returning or repeat customer. Whether it is a lease or working capital product, the value to the customer and finance company alike is a familiar and efficient transaction. Mining the portfolio database reduces the chances of the competition creeping in, builds customer loyalty and maximizes the customer’s relationship. And as we all know, a customer with institutional credit history is always a better risk than the alternative. Good news all around.

Equipment finance companies that outsource their working capital offering are able to “replace” riskier spread margin with upfront fee income. It is true that working capital products are higher priced, due to their unsecured nature, ease and convenience.  Equipment finance companies that provide a working capital solution directly to their customers create long-term value of revenue streams.

Now that we have covered the why for an equipment finance company to offer its customers a working capital product, let’s touch on a few more benefits to the lessee. The primary value for the lessee or small business owner is convenience. This is the same convenience factor that has given rise to the equipment leasing space. As previously mentioned, traditional banks can be a difficult pill for the small business owner to swallow. Anyone who has owned a business understands that activity away from the business is costing money to the bottom line, so efficiency, ease and speed is what will sell all day long.

Newly financed equipment most often requires additional dollars to install the asset to be fully operational. The small business owner could pay these expenses out-of-pocket; however, he/she may rather borrow the funds to keep cash flow fluid. If the business has already applied for credit with the equipment finance company, it makes efficiency-sense to obtain all required financial proceeds through one finance partner. I have yet to find one busy business proprietor that likes living through the borrowing experience, let alone twice.

The fact the lessee is purchasing equipment implies a signal of growth and to grow a business it takes capital. Look past the equipment purchase as the business may have other drivers that require investment in the company, including project finance, growth capital and cash loans. Expansions or remodels require upfront capital before there is a return on the investment – money and timing unfortunately do not always synchronize.  Working capital allows the business owner to use the dollars in all the right places at the right time.

In the fast-paced world of equipment financing, we are driven by our obligation to help our customers be successful: “Their success is my success.” As you have read, there are several valid reasons for equipment finance companies to offer working capital to their lessees: distilled, it just makes good business sense with the right product partner.

Now that you are armed with more insight on the value of a working capital product, consider if the product is a fit for your equipment finance business model.

Opportunity is knocking, are you going to open the door?